Power Finance Corporation’s NCD issue opens today: A Moneycontrol review

PFC NCD

Power Finance Corporation (PFC), a maharatna Central Public Sector Enterprises (CPSE), has launched a Rs 500 crore non-convertible debenture (NCD) public issue on July 21. It comes with a greenshoe option of Rs 4,500 crore, effectively making it a Rs 5,000 crore issue.

PFC provides loans for a range of power sector activities, like generation, distribution, transmission, and plant renovation and maintenance.

The NCDs is rated AAA, with a stable outlook by CARE Ratings, CRISIL and ICRA, which is rare for an NCD issue.

The AAA rating for the NCDs indicates the highest degree of safety, regarding the timely servicing of financial obligations.

This issue has a maturity or tenure options of three years, 10 years and 15 years, with the annual coupon payment being offered across Series I, II, and III, respectively.

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The coupon offered in various categories ranges from 7.45 percent to 7.54 percent per annum.

In 2021, the company had launched a Rs 5,000 crore NCD issue, offering coupon in the range of 4.80-7.15 percent.

With the last offering, the gap of interest rate offered has shrunk across tenors (see graph).

What works?

PFC plays an important role in the Indian power sector, not only by providing finance but also by implementing the government’s power sector policies.

In terms of financials, as on March 31, the company’s capital adequacy ratio (CAR) stood at 24.37 percent and it has a standalone net worth of Rs 68,202 crore.

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Further, PFC’s standalone asset quality has improved considerably, with gross non-performing assets (GNPA) and net NPA improving from 5.70 percent and 2.16 percent, respectively, in FY21 to 3.91 percent and 1.10 percent, respectively, in FY23.

“The issue is AAA-rated by three rating agencies and the company has a very good capital adequacy ratio. It is not overleveraged and is of decent size. Also, last year, it saw an all-time high in terms of profitability. Such a large issue by a government-owned company is hardly available for retail investors,” said Ajay Manglunia, Managing Director and Head of Investment Group at JM Financial.

The interest rates offered are also higher, compared to those offered by fixed deposits (FDs) of major banks in India.

What doesn’t?

In its rating rationale, Crisil highlighted the inherent vulnerability in the asset quality of PFC, and a significant sectoral and customer concentration.

“PFC's asset quality remains inherently vulnerable to the weak credit risk profiles of borrowers. The company caters only to the power sector, with 88 percent of its consolidated loan book as on December 31, 2022, to the government sector power utilities (including generation, transmission, and discoms),” said the rating agency.

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PSUs, especially discoms, are an inherently weak asset class because of their poor financial risk profiles.

ICRA, meanwhile, also highlighted high concentration risk and portfolio vulnerability as challenges.

The NCDs come in three tenor options (three years, five years and 15 years). For the highest coupon rate, investors would need to lock their investments for a longer period, which brings in additional risks.

Also, bank FDs are insured up to Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This is not available for NCDs.

What should investors do?

In terms of interest rate cycles, we are in a situation where rates have gone up too much, and are expected to soften six months to one year down the line.

Given this, investors are looking to lock in rates at the peak of the interest rate cycle for a long-term period.

“From a retail or HNI perspective, I would say it's a decent opportunity. Also, in terms of our interactions with the investor community, we see maximum interest for the 15-year tenure,” said Manglunia.

According to Vikram Dalal, Founder and Managing Director, Synergee Capital Services, there are expectations that the RBI may soon start giving dovish signals. In that case, a longer tenure NCD (10 years or 15 years) may start trading at a premium.

“The issue is giving better interest than bank FDs with comparable ratings. Also, there is a greater liquidity option as the NCD will be listed on the exchange. It's a good option, because it's a secure paper,” said Dalal.

An NCD issue comes with a fair bit of credit risk even if it is rated AAA. In the past, some issues with even the highest rating had defaulted, leaving investors in a fix.

Further, NCD issues pale when compared to debt funds on liquidity grounds. Redeeming NCDs before maturity might be a challenge, as the Indian debt market is not that deep.

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Retail investors with a moderate risk appetite can subscribe to this issue.

The issue opened on July 21, 2023, and will close on July 28, with an option of early closure or extension.